1. Gross Domestic Product Measuring national productivity.

2. What is GDP?  GDP measures how much a nation produces.  It is used to track the growth of a national economy.  GDP is the dollar value (at market prices) of all final goods and services produced during a stated period of time (usually one year).

3. What does “final goods” mean?  Final goods are purchased for use by the consumer that are not used for resale or in further production processes.  If goods are purchased to be used in further production processes or for resale they are called intermediate goods.  Measuring only final goods helps economists avoid counting the same goods more than once.

4. Income Approach vs. Expenditure Approach Expenditure Approach  GDP=C+Ig+G+Xn  Personal Consumption  Gross Private Investment  Capital goods for business  Construction  Inventory changes  Government Purchases  Net Exports  Exports minus imports  Xn=X-M Income Approach  NI + Adjustments  National Income (NI)  Wages  Rents  Interest  Profits  Taxes  Statistical Adjustments  Net foreign factor income  Statistical discrepancy  Depreciation allowance

5. Nominal GDP vs. Real GDP Nominal GDP  GDP that is not adjusted for changes in prices Real GDP  GDP that is adjusted for changes in price  Real GDP = (Nominal GDP x100) /Price Index  Real GDP = (Nominal GDP)/(Price Index in hundreths)

6. What is a Price Index?  A price index is a measure of the change in value of money (purchasing power).  It is used to assess inflation or deflation.  It is found by comparing the prices of a set amount of goods in one year to that of another year and multiplying by 100:  100[(Market Basket Year X)/(Market Basket Year Y)]

7. How can GDP be used to assess economic growth?  Output Growth Rate is a direct measure of the change in GDP from one year to another  100[(real GDP in Year 2 – real GDP in Year 1)/(real GDP in Year 1)]  Real GDP per capita allows economists to analyze how much of output growth went to standard of living improvements and how much went to an increased population  (real GDP in Year 1)/(population in Year 1)

8. Computing GDP & Growth Nominal GDP Price Index Population Year 3 $5,00012511 Year 4 $6,60015012 What is the real GDP in Year 3? What is the real GDP in Year 4? What is the real GDP per capita in Year 3? What Is the real GDP per capita in Year 4? What is the rate of real output between Years 3 & 4? What is the rate of real output growth per capita between Years 3 & 4? (Hint: Use per capita data in the output growth rate formula.)

9. GDP’s Shortcomings  Does not factor in the black market or non-market transactions  Does not account for externalities  Does not consider social benefits of consumption or production  Does not account for utility gained or lost as a result of consumption of a product  (e.g. GDP can increase during war)